Oct 1 (Reuters) - Detroit on Tuesday defaulted on more than$600 million of general obligation bonds deemed unsecured by thecity's emergency manager, a city spokesman said.
The move marked the second bond default by cash-strappedDetroit after Kevyn Orr, the former corporate bankruptcyattorney who has been running the city since March, announced onJune 14 a moratorium on unsecured debt payments.
Bill Nowling, Orr's spokesman, confirmed the city did notmake debt service payments due on Tuesday on the unsecured GObonds, including $411 million of voter-approved unlimited taxdebt. However, payments were made on about $349 million of GObonds deemed secured debt by the city, he added.
"Unsecured debts will be satisfied in the course of a planof adjustment or by mutual agreement of the parties, andapproval of the judge," Nowling said, referring to Detroit'sbankruptcy filing.
With the city sinking under more than $18 billion of debtand other obligations, Orr on July 18 filed what would be thebiggest Chapter 9 municipal bankruptcy in U.S. history. Orr hassaid that about $11.9 billion of that debt was unsecured,lumping GO bond creditors in with the city's public pensionfunds and retiree health care.
The treatment particularly of voter-approved bonds is likelyto be challenged in court unless mediation ordered by the courtresults in some kind of settlement.
Nowling did not supply the total amount of bond paymentsthat were or were not made by the city. A spokeswoman for U.S.Bank, which receives and disperses payments for Detroit bondissues, declined to comment on Tuesday.
As trustee for Detroit bond issues, U.S. Bank, was expectedto officially notify bondholders of a default. The trustservices of U.S. Bank are based in St. Paul, Minn.
Nowling also declined to comment on what the city planned todo with revenue from property taxes specifically levied for thepayment of the voter-approved GO bonds. Diverting the money topay for city operations would violate the Michigan Constitution,according to state constitutional experts.
"This is a question which will be dealt with in a proposedplan of action, which will not be presented until aftereligibility is determined," Nowling said.
U.S. Judge Stephen Rhodes is scheduled to hold hearings thismonth on objections to Detroit's legal right and eligibility tobe in bankruptcy.
Bondholders of defaulted debt still will be paid as citydocuments indicate that most of the GO bonds were insured.Assured Guaranty; National Public Finance Guarantee Corp, thepublic finance subsidiary of MBIA Inc; Ambac Assurance Corp; andSyncora Guarantee have said they will make timely payments onthe bonds they insured.
Ahead of the default, Fitch Ratings on Monday droppedDetroit's credit rating to the lowest level of D fromC, affecting $613.8 million of limited and unlimited taxGO bonds.
In June, Detroit defaulted on $1.45 billion of pension debtthat was also insured, although one of the insurers - FinancialGuaranty Insurance Co - will be initially paying only 17 centson the dollar for insurance claims, according to a Sept. 20notice from U.S. Bank. Syncora, the other pension debt insurer,has made full payments.
- Security Upgrades & Downgrades
- general obligation bonds